While the entire world has been reeling from the economic impacts of COVID-19, family businesses are especially susceptible. A recent KPMG study found that 78% of family businesses saw their revenues affected directly by the pandemic, with 83% of those companies experiencing a decline.
Factor in the threat of rising corporate and capital gains taxes, and establishing a secure path to business succession is more important than ever. An employee stock ownership plan (ESOP) is one often-overlooked solution.
Helping family business owners understand their options
The survival of a family-owned business has always been a topic best handled thoughtfully and meticulously. Succession planning is a sensitive subject. Founders are often highly protective of the company into which they poured so much of their effort and resources. They want to keep their legacies intact, and, as such, they wouldn’t want to transition ownership to just anyone. Multigenerational assets are just too valuable to give up.
Traditionally, we would almost invariably see ownership pass to a family member, but that’s no longer a given. In fact, according to research published by private business non-profit SCORE, only about one-third of family businesses survive the transition from first- to second-generation ownership – and this number drops precipitously through subsequent generations. If the founder/owner doesn’t put a plan in place ahead of time, this can lead to unnecessary conflict and friction within the family, along with estate tax burdens that could jeopardize the company and even require a premature sale.
When it’s time for a transition, wealth managers are in a unique position to help owners understand their M&A alternatives. Third-party sales and private equity deals are common options, but these often come with significant tax burdens and generally result in the end of a family’s involvement in the business.
Introducing your clients to ESOPs
On the other hand, an ESOP is an advantageous succession and exit planning alternative that wealth managers can introduce to clients. Working with an employee ownership advisor, wealth managers can help walk business owners and their families through the potential structures, mechanics, and wide-ranging benefits of ESOPs.
In a typical ESOP transaction, owners of a privately-held company sell some or all of their stock to an employee trust at a fair market valuation. To facilitate the purchase, the company arranges financing on the ESOP’s behalf.
Explaining the advantages of an ESOP
For selling shareholders, perhaps the biggest advantage is the ability to create liquidity and diversification of wealth from the business—which typically is their largest asset. Additionally, if certain requirements are met, selling shareholders can defer and potentially eliminate capital gains taxes on the sale by reinvesting the proceeds into certain qualified securities. This is known as a 1042 rollover.
ESOPs also provide flexibility, as the shareholders can consider partial sales (sometimes in stages over time) or full 100% sales. This flexibility creates opportunities for families to diversify their wealth while maintaining a meaningful interest in the companies they’ve built.
Their companies also receive income tax deductions equal to the ESOP sale value, which can substantially reduce the amount of cash flow lost to income taxes. This cash flow advantage can even be made permanent, since 100% employee-owned S corporations are not subject to federal and most state income taxes.
Finally, when it comes to securing their legacies, an ESOP allows owners to keep their companies independent and locally-owned, while fostering a culture of employee ownership. The latter has been shown to drive productivity and retention – thanks to employees having a real stake in the company. By reinforcing a family business’s foundation, an ESOP can help these companies thrive for years to come.
Taking the next steps toward employee ownership
If an ESOP makes sense for a client, it’s essential that a wealth advisor connect with a specialized advisory firm. While employee ownership carries significant potential benefits, these transactions are complex and federally regulated. An experienced guide should understand all facets of ESOP structuring, financing, and administration.
A skilled ESOP advisor can quantify financial benefits, estimate a company’s fair market value, and explore competitive financing, while comparing to other potential options available to the company. This even-handed analysis should help determine whether an ESOP is the appropriate strategy.
If a client and their company opt to move ahead with an employee stock ownership plan, an advisor can map out and quarterback a transaction process. That includes pulling in any necessary third-party professionals, arranging financing, and driving the overall deal process from start to finish.
An ESOP-oriented succession strategy demands collaboration
Due to the options and relative complexities of employee ownership, it’s important that company leaders, family members, and trusted advisors be engaged early in a process. Education and communication are vital. The needs and goals of all parties must be considered, and everyone should understand how an ESOP works.
Wealth managers who introduce the ESOP option to family businesses, and put proven feasibility and transaction processes in place, can drive value for all stakeholders. Employee ownership may not be in your standard toolkit, but advisors that appreciate this tax-advantaged liquidity alternative are best positioned to demonstrate their value in helping business owners determine the right path toward succession.
George Thacker is a managing director at CSG Partners.
buy generic lanoxin over the counter – order generic trandate 100mg buy lasix
metoprolol 100mg cheap – micardis without prescription adalat usa
order hydrochlorothiazide sale – norvasc 5mg without prescription bisoprolol 10mg drug
nitroglycerin for sale online – buy indapamide 1.5mg generic brand diovan 160mg
simvastatin land – lopid scream atorvastatin 20mg drug
crestor fold – caduet buy mystery caduet buy spell
viagra professional online common – viagra gold online sparkler levitra oral jelly prepare
dapoxetine abroad – sildigra robe cialis with dapoxetine keen
cenforce online edge – tadalis online pan brand viagra pills thirty
brand cialis exist – alprostadil excite penisole onto
brand cialis bare – penisole drown penisole afternoon
cialis soft tabs coffin – levitra soft mister viagra oral jelly advice
cialis soft tabs online chicken – cialis super active pills chase1 viagra oral jelly trial
priligy joke – priligy fancy cialis with dapoxetine treasure
cenforce basil – kamagra flap brand viagra lunch
asthma treatment sailor – asthma medication dread asthma treatment desert
acne medication explanation – acne medication material acne treatment disguise
prostatitis treatment sun – prostatitis treatment rim pills for treat prostatitis two
uti treatment charge – treatment for uti bug uti antibiotics push
claritin remove – loratadine grotesque loratadine medication shirt
valtrex pills pit – valacyclovir pills castle valacyclovir pills ship
priligy direction – priligy cousin dapoxetine stool
loratadine medication eye – claritin pills park loratadine thy
ascorbic acid admiration – ascorbic acid dreadful ascorbic acid professor
promethazine ridge – promethazine muffle promethazine mound
biaxin sound – albendazole pills mission cytotec humble
fludrocortisone pills mortal – esomeprazole ball lansoprazole pills sheer
rabeprazole 10mg uk – reglan online motilium 10mg us
buy dulcolax 5mg generic – buy liv52 sale liv52 price
buy zovirax online – cost desogestrel order duphaston 10 mg without prescription
bactrim 480mg cost – purchase levetiracetam pills order tobramycin 5mg generic
buy griseofulvin online – lopid 300 mg drug gemfibrozil brand
cost dimenhydrinate 50 mg – buy risedronate 35mg online cheap risedronate 35mg tablet
enalapril 5mg price – where can i buy latanoprost buy latanoprost online
etodolac 600mg cost – buy cilostazol 100 mg online cheap order cilostazol 100 mg online